Grow with Governance: Family governance impacts the culture of a family-run business, says Equations Advisors' Mita Dixit
Bharathy Iyer and Jescilia K
20 Aug 2021
Separating business management and ownership roles are critical for any family-run business, says Mita Dixit, co-founder and director at Equations, a family business advisory company. Dixit, who is also an Independent Director with HCC and Anuh Pharma, shared her learnings in family-run business with Mentormyboard’s (MMB) Bharathy Iyer and Free Press Journal’s (FPJ) Jescilia K. In her over two decades of experience in family business advisory, management consulting, and strategic marketing, Dixit has managed to advise over 100 listed and unlisted family-run businesses.
Tell us about your board journey in family-run businesses. And what changes have been seen in this space?
My interest in corporate governance started in the year 2008. I was doing my PhD in Indian family businesses and particularly about their conflicts and splits. It was also the time when the Satyam scam happened. That is when the word corporate governance got the spotlight. The new era of corporate governance started due to the Satyam scam. That time, I found 69 per cent of the top 500 listed companies on the Bombay Stock Exchange were controlled by promoter families or family branches. Boards of these family businesses were run by family members, non-family executives and also other professionals.
The effectiveness of the board was visible in the market capitalisation of these companies — higher the market capitalisation, better was the board management. This was in 2008-2009. However, since then a lot has changed.
This was the starting point of my journey in corporate governance and understanding the nuisance of governance — especially at the family and business front. In family-promoted or family-driven companies, family or promoter governance and corporate governance are two sides of the same coin. They are not and cannot be separated. They have to work in tandem.
In the last 10 years as a family business advisor, I have found that an agile and progressive board is essential for every company. And there is an inclination towards this among younger generations in a family-run business.
Having interacted with 100s of owner families and getting deeper insights — into what keeps them together or separates them, how do they build their legacy or continue on a growth path — I have learnt three things: management of the board, transparency, and system processes are vital.
Most important is the role and responsibilities of board members especially when they are related. A lot of dichotomy or misalignment happens in some cases. For instance, when the father, who is also the chairman of the board, is the founder of a business and has been in the business for decades, finds himself between the new generation (his son or nephew); and his old trusted advisors. It is during such a situation the board has to find a way to align itself.
Misalignment is huge among promoter families that are not yet listed. However lately, there are a lot of changes that are happening among them as well.
Can you share an instance where there was a dichotomy or any specific experience which is a phenomenon related to a family-run business?
I have seen closely how family governance impacts the culture of a company. When there are more than two family members on the board, then deep down the family values that are passed on (over two or three generations) is reflected in the way businesses operate. During the pandemic, almost all companies went through difficult times and then there were some who got excellent opportunities.
In one company, where I am an Independent Director, they were facing challenges during COVID and its subsequent lockdown. However, the head of the company decided to pay the salaries of all employees even during the lockdown (when no work was on). Such decisions are driven by the values of the promoter family. Such values are percolated into a board culture as well.
Meanwhile, the board prevents the promoter family from entering into familial areas or nepotism in the organisation.
Many top companies like Tata, Godrej, Birla and others have been in business for many years. What did they do best that worked for them compared to other business houses (many generations old) that did not thrive?
About 95 per cent of these large companies have built a legacy only because they have been able to separate management and ownership roles. It is not an easy exercise. It is time-consuming and requires a lot of resilience. When you know to differentiate two, then the whole governance structure falls in place.
What would your advice be to an independent director (IDs) looking at joining a family-run business?
From my learnings, my advice to aspiring IDs will be to become experts on their own domain, also avoid getting attached emotionally with the board or its decisions, and be a gatekeeper or look at things in an independent manner.
The board is such a mechanism that it has tremendous strength to stop the company from derailing from its larger goal. My advice to IDs will be to ensure that board decisions that are taken will benefit all stakeholders including society at large.
My advice to board members who are also promoters’ family members is that there is no harm in making the board of an unlisted company as good as a corporate board (or a listed board).